S.Africa faces budget crunch as downgrade looms

Wednesday February 24 2016

In Summary

Cuts in government spending and tax hikes are forecast, despite low growth, high unemployment and widespread poverty in Africa's most developed economy.

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South Africa's finance minister walks a tightrope Wednesday as he presents a budget watched closely by ratings agencies that are on the verge of downgrading the country's debt to junk status.

The International Monetary Fund and the World Bank predict South Africa's growth this year will slide to less than one percent — far below levels needed to deal with unemployment running at 25 percent.

Minister Pravin Gordhan is faced with the difficult balancing act of trying to please both the financial world and a government facing voters in municipal elections this year.

"The minister is in a tight spot with very little fiscal space, and even less political space, available to respond to the economic crisis and the risk of a sovereign ratings downgrade in South Africa," said opposition Democratic Alliance shadow finance minister David Maynier.

Cuts in government spending and tax hikes are forecast, despite low growth, high unemployment and widespread poverty in Africa's most developed economy.

"We expect a mixture of tax increases and expenditure cuts to offset higher spending on education and debt service costs, as well as the marked impact of lower growth on revenues," said Nomura financial services group.

"However, we think cutting through heavy spin, the budget will fail to deliver credibly on a wider, pro-growth, microeconomic structural reform path."Winning the confidence of the ratings agencies — which help determine how much countries pay to borrow money — was made more difficult when President Jacob Zuma shocked markets in December by firing two finance ministers within four days.

Gordhan, who was widely respected when he held the position from 2009 to 2014, was recalled in a panicked attempt to limit the damage to the country's credibility.

REASSURE INVESTORS

The budget needs to set out "concrete plans to reassure local and foreign investors that South Africa is still a destination worthy of their investment," said Eric Enslin, CEO of FNB Private Wealth and RMB Private Bank.

The changes investors would like to see include privatisation — or part privatisation — of under-performing state-owned enterprises, including the loss-making national carrier South African Airways.

Zuma hinted in his state of the nation address earlier this week that some moves on state owned enterprises were on the cards.But privatisation would face strong resistance from within the ruling African National Congress.

"While I don't expect the word 'privatisation' to get much air time, you can be sure that terms like 'rationalisation' and 'equity raising from the private sector' will," analyst Stuart Theobald wrote in Business day this week.

Zuma, apparently shaken by the reaction to his firing of the finance ministers and by the threat of a ratings downgrade, met with business leaders this month to try to mount a joint effort to turn the economy around.

Apart from policy missteps, the resource-rich economy has been hard hit by falling commodity prices on reduced demand by China, and an agricultural sector hobbled by the worst drought in more than a century.

The rand has recovered slightly this month, up 3.8 percent against the dollar, after plunging 27 percent in the previous 12 months.